Which best explains how contractionary policies can hamper economic growth?
Answered by Jacquelline Hill
The adoption of the fiscal policy by a government depends on the economic state of the country and, accordingly, on ways to balance the economy. Expansionary policy is applied in the period of the economic recession; in order to increase GDP, the government reduces taxes and increases government spending and transfer payments.
Overheating of the economy is also a negative phenomenon, as it leads to rapid inflation. In this case, contractionary policy is implemented with reducing government spending and taxes increasing. As a result, a budget surplus occurs, which is withdrawn from the circulation or used for repayment of external debts. Inflation slows down, but the unemployment rises and the volume of production decreases that cause a slowdown in economic growth. Contractionary fiscal policy, as well as expansionary, has some disadvantages. It can not only slow down the economy but lead to the recession or destabilization.